The Fed Put Is Kaput
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Get started at Betterment.com. Welcome to the Wednesday On The Tape podcast. Dan and I and the entire team are very excited because we have a great new partner in Betterment. So going forward, not only we hear us on Mondays On The Tape, on Fridays On The Tape, but Wednesdays as well, Dan. Yeah, pretty epic day for us, Guy. I don't think you thought a few years ago we're going to say welcome to the Wednesday edition of the On The Tape podcast. Yeah, we're excited. We continue to

add some great, great partners. Betterment is one of those. So we're looking forward to three days a week on the tape, Guy. All right, we got a lot of stuff to go over here, don't we? Yeah, we do. You know, one of the things that kind of stuck out with me, I mean, yesterday was like kind of one of the first big days that we've had in a week where the Fateful Eight was leading the market lower. We know, you know, NVIDIA was a big part of that. You and I are going to be keeping a very close eye on NVIDIA today. It was down, what, six and a quarter percent. I think

In general, I mean, Jensen Wang went out there. He was the keynote at CES. There was high expectations. The stock had basically closed at a new all-time high on Monday afternoon, and investors were just not that wooed about what he had to say. It was just kind of a lot

more of the same. Yeah, it's really interesting. We've seen a couple times over the last year, days like we saw yesterday in NVIDIA. And yesterday, by the way, a stock traded almost, Dan, 400 million shares, which was close to twice normal volume. And it did it

having made an all-time high of 153.13 and then obviously closing right around the lows. So, you know, the technicians out there, the people that look at these things closely, will talk about this engulfing pattern. And we've seen now three of them

over the last year. We saw one in March of last year, where the stock subsequently went down about 30% to 35%. We saw it again in June, where we quickly had about a 35% to 40% move to the downside. And we obviously saw it yesterday. So people are going to be laser focused on that, obviously, for what it means to Nvidia, but what it could

potentially mean to the broader market. Yeah, you did a great job charting that out yesterday on the market call. And it just kind of was really interesting to see those new highs that reversed and closed on the lows. And that's the sort of thing on big volume, as you just mentioned, is something worth

keeping an eye open. We're about a half an hour after the opening Wednesday morning again, and I'm keeping a close eye, like we just said, on NVIDIA, but it's also the rest of that fateful eight guy. If we see those names turn lower, I just don't know how the market can keep growing

grinding higher, that sort of idea of distribution or broadening out. You know, it is what it is. So we're tracking those names pretty closely. Also, the SMH, the ETF that tracks the semiconductor industry. I mean, Taiwan Semi had that big gap to new all-time highs, the excitement in and around some of the AI expectations there. Also, Microsoft...

I guess they put out a number, $80 billion in CapEx this year for AI spending. That's not all on chips, but that one has given back most of the recent gains over the last couple of days. By the time folks are listening to this guy, we probably have the Fed minutes out. This is one that we have a jobs report Friday morning. We have the market closed tomorrow, Thursday. Pretty interesting setup if you think about some of the data that we're going to get over the next few trading days and not a whole heck of a lot of trading on the next few days.

No, and it's interesting because we're coming off, obviously, a couple of holiday-shortened weeks. So the year's gotten itself off to a pretty odd start in terms of the way the calendar has fallen and obviously in terms of the market being closed on Thursday in remembrance of Jimmy Carter. With that said, you're right to bring up Fed minutes. And I think what we're seeing now is a Federal Reserve that looks at this entire picture and coming to conclusions that I don't think

the market thought they would come to maybe this time last year or the summer of last year. And I think that's why the bond market has been trying to figure out what the right yield in terms of tenure is. And I think that's why the overall equity market is now having a little consternation about these higher yields. Tenure yields, by the way,

north of 4.7%, the highest levels we've seen in probably the last 10 or 11 months. And I think the market is waking up to that. So typically Fed minutes can be a ho-hum thing, but given what the bond market has done recently, Dan, I think participants can be laser focused on some of the language coming out. December 18th.

The Fed had that meeting. I think they surprised most folks when they talked about slowing the pace of cuts. We saw that was down 2%. It was a big move to the downside, right? And a lot of those kind of long duration, high valuation tech stocks led to the downside. That's when we came up with the Faithful Eight guy because Broadcom had just entered that trillion dollar market cap. And that's why they continue to be important. We're just going to keep hammering that down.

But if you think about where the S&P 500 was on December 8th during that Fed meeting, I mean, we were up there near 6,100. Here we are at 5,900 in the S&P 500. We might look back, Guy, and say, oh, man, that was like a really important

day because we've made a series of lower highs and lower lows in the S&P 500. And then you hear things like, you know, Lizanne Saunders tweeted this out this morning that the equity risk premium is at a 23-year low, right? That is the expectation of equity we're

returns versus the risk-free rate of a treasury yield there. So 23-year lows, I think that's worth keeping an eye on. Listen, we could have been quoting that guy over the last few months, which we kind of have, and the S&P 500 ground up in the face of that. But again, these are things that you want to keep a close eye on. It's one of those indicators or one of those metrics that you don't necessarily trade off of, but it's something you have to sort of have

whether it's in your rear view mirror or right in front of you, because what it suggests is the market has less and less room for error if there were to be a mistake or if something were to happen. And, you know, a 23 year low in something like that, um,

Augers particularly poorly for the potential performance of the overall market, especially if yields continue to go higher, which is the reason why we've been sort of talking about yields as much as we have. So that's something to watch as well. Liz Ann has pointed it out. People like Doug Cass have pointed it out as well.

And I think it's going to be something you hear more from market participants as these weeks go on, again, especially if yields continue to grind higher. And again, I don't think the market anticipated this. My sense is 85% to 90% of market participants would have thought by this time, we'd see 10-year yields significantly lower than where we currently are. Yet here we are some 110 basis points higher than the lows we saw in September when the Fed started

cutting rates, somewhat counterintuitive. But, you know, if you sort of look below the surface, it all starts to make sense. Yeah, well, you know, 4.7% in the 10-year, you know, last time we were there, I think the S&P 500 was 4,500. Last time the 10-year was at 5%. This is late 2023. The S&P 500 was

was at 4,200. So here we are, as we just said, 5,900 in the S&P 500. That's why those metrics that we just quoted are really important because they are disregarding some of the past performance. And, you know, the last thing, you know, we kept on hearing higher for longer in late 23. Well, the 10-year yield kissed 5% and then it came in

immediately, I think you are of the belief that that is not going to be the case going forward, especially when you think about the rate differentials about what we're seeing in China. I think their yields are going to like multi-decade lows right now. And people are super worried about what the deflation means there for our disinflation. That was the story of the last year, disinflation. That's why the Fed was going to be able to cut rates. Going into 24, expect

for rate cuts were over 100 basis points, maybe even 150 basis points. And look what we got. We got this panic rate cut in September. And now three months after that, the Fed is talking about, you know, kind of lowering the pace of rate cuts. It just seems like maybe they got this one wrong guy. What the bond market is telling the Fed, what the bond market is trying to push the Fed is that, yeah, you in fact have gotten it wrong and you should reexamine what you've been doing over the last year, year and a half. And

And I'm one of these people, again, I didn't see the urge or the need to cut at the time. I thought they should have sort of let things go on their very way. I think there are players that get concerned when you see days to the downside in the market, like we saw on August 5th, as you said, like we saw on December 18th, to a certain extent, December 27th.

and they look for the bond market, I look for the Federal Reserve, quite frankly, as sort of a bit of a safety net. I've never been one to believe that they should be a safety net, but the market has gotten sort of conditioned to believe that. With all that said, the bond market is going to test the

the Federal Reserve this year in ways they probably haven't been tested since 2018 or thereabouts. And I say that because this incoming administration is clearly keen on seeing rates lower. They're clearly keen on seeing the stock market go higher.

But the question you have to ask yourself, at what cost and what happens if, in fact, they continue to sort of move rates to the downside? Which, again, going back to your initial comments, why these Fed minutes are so important. Right. And just the way I'm thinking about this is, again, we just kind of described, you know, the bonds versus stocks argument here. If the Fed were to get a bit easier because the new administration is pushing them to do that, that doesn't mean that.

that yields are going lower. And you made this point again and again. So the Fed put is kind of kaput. If the stock market starts going lower and the Fed tries to get easier, that maybe makes the whole situation that much worse because if yields are higher because fears of inflation

Right. Then if they lower interest rates, that just basically, you know, inflames inflation. And then you have all this tariff talk, which we haven't even got to. You know, the last thing I want to hit on this guy is that there was an article in CNBC dot com. It was talking about hedge funds turning cautious on stocks to start 2025. I thought this was interesting. They're quoting Goldman Sachs data. Hedge funds were net sellers of U.S. stocks in each of the five sessions from December 27th through Friday 21st.

Jan 3, dumping shares at their fastest pace in more than seven months. I think that's kind of interesting. Healthcare, financials, and industrial stocks saw the most selling from hedge funds. What's interesting there about financials and industrials, forget about healthcare, is that obviously industrials, very cyclical. And you can even make the case that financials are kind of cyclical too, based on what your outlook is for the economy. I'm surprised I didn't see

info tech in that list too, because we know that we've seen 13 Fs from Q3 that came out, I want to say in mid-December or so. And we saw a lot of prominent hedge funds kind of peeling out of some of those Gen AI trades. Well, you know, it's interesting and that's something you absolutely have to watch. And I think for a lot of these hedge funds, they're taking their cues from what

We talked about earlier in terms of the equity risk premium with something Lizanne Saunders brought up today, but other people have brought up as well as we addressed. I think they're taking their cues from the current valuation of the stock market, which is probably a couple of turns higher than the norm. I think they're taking their cues from an expected EPS growth this year

of 14.5% saying, you know what, it probably doesn't add up in terms of what we're seeing here on the ground. I think to your point, they're taking their cues from some geopolitical things. I think they're taking their cues from this seemingly ratcheting up in rhetoric in terms of tariffs. There are just a lot of things out there that if you look at them individually, maybe not a big deal. I think collectively, they are. So that starts to make a lot of sense. And then I'll add to this,

I think 2025, which obviously has just started, I think it's going to be a year where volatility surprises people a number of times on the upside. I don't think we're going to see a prolonged period of high volatility, but I think along the way, especially early this year, we're going to see spikes in volatility that, quite frankly, we haven't seen

outside of August 5th in quite some time. That comes, you know, in the face of just a lot of this macro data. You know, what is this jobs number looks like, right? We saw a pretty strong number, you know, last month. A lot of folks are expecting that to moderate a bit. And I just want to highlight one thing, because you've been talking about the potential for the unemployment rate to get to 4.5%, maybe on its way to 5% if we do start to see a slowing economy. Your dollar general, and this is one that you've been highlighting recently,

for a long time. You know what I mean? This kind of spread between what's going on with Walmart, the trade down there, but on the very low end, on the dollar general today is down 4%. It's making new lows here. And you just thought this is a chart. What is the low? Like what is the bottom in this thing? And what is it saying about a lower end consumer? Well,

Well, we're seeing Dollar General. I'm glad you brought that up. I mean, if you recall, and this is important for some of the listeners and viewers, I mean, this is a stock in the form of Dollar General that had a meteoric rise from, I want to say, middle of 2016 into and through COVID-19.

For a lot of obvious reasons that we don't need to necessarily get into, but at one point in the fall of 2022, this was a stock that was probably approaching $275 or so. As we're sitting here today, we're trading either side of $71. You just mentioned a new 52-week low, but

Quite frankly, Dan, this is the lowest levels we've probably seen in about eight years or so. So to answer your question specifically, what is it telling you when theoretically stocks should be doing well as people trade down are doing extraordinarily poorly? Where's that trade down going from historically in slowing times, in times of sort of consumer distress?

The trade down is in the form of a dollar general and a dollar tree. Now we're seeing the trade down from a dollar general and a dollar tree. And I think that's got to be something, again, not necessarily to trade the stocks, but what is that telling you? What's the narrative around that?

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I want to hit this too, Guy, because it was a conversation we had on Fast Money, I want to say, on Monday. I just mentioned that maybe some of these banks are a bit cyclical based on some of the things we just talked about, unemployment rate, consumer confidence, this kind of K-shaped sort of economy we have between a higher-end consumer and a lower-end consumer.

And I think about the banks, and I think this is like interesting to tie this all together. You know, a lot of the enthusiasm that we've seen since the election was this kind of promise of deregulation in certain sectors, right? In financials and banks in particular, you know, we're talking about this and, you know, it's kind of like confusing to me a little bit that investors are so excited for the potential of banking deregulation. Now, we've seen that over the last 25 years out of a couple Republican administrations.

And both times it's ended in tears. And I think you just have to go back. And you were making this point in early 23 when we lost a half a dozen regional banks. Why did we lose them? Because of some deregulation that we had in the first Trump administration, right? There was some legislation signed in, I think in 2018, and a bunch of these regional banks and some of their capital controls, and they fell below these regulations. And what did we do? As soon as there was some distress...

As soon as interest rates started going higher, I mean, these banks were not equipped to handle those environments. And so the idea of another bout of deregulation two years after the regional banking crisis just seems like lunacy to me. I'm just curious what you think. And a lot of these companies are doing just fine with record profits right now. There's nothing political about this. And what's really fascinating is if you really go back in time, it was under

of the Carter administration that deregulation actually started to become a thing. So, to a certain extent, some of the industries that are enjoying the fruits of that deregulation, the seeds were sown some 48, 50 or so years ago, number one. Again, not being political at all, but that's just factually true. But to your point, and I think what we historically have seen is the pendulum swings in a meaningful way

on the regulation front. It swings to extremes where banks are being sort of

uh stranglehold in terms of regulation and obviously we've seen times where it goes the entire other way we're left to their own devices they're going to do things that inevitably create problems and for whatever reason there's seemingly no middle ground here and i don't think we're necessarily going to find it under this administration but to get back to the stock market quickly i think the rise that we've seen in a lot of these banks over the last you know call it four or five months

was predicated on the potential of a Trump victory, which subsequently happened, and the hope that, again, these banks would sort of be unconstrained by regulation and we'd see a lot more M&A under this administration. The flip side of that coin, of course, is

You said it earlier. Banks are very cyclical. And if we do see a slowdown in the economy, banks are not going to be spared from that. So if you want to watch something else earlier this year, watch the performance of banks, especially now that the yield curve is as steep as we've seen in quite some time and an environment where clearly interest rates are going higher. That's going to be a great tell. Well, and that was the exact cock

that got a lot of these regional banks in trouble. It was one of the things that put a microscope on Bank America and their kind of mark-to-market, held-to-maturity sort of portfolio, right? Schwab was under that sort of guise, too. So I just think that that's kind of worth paying attention to because...

again, when you have a level of complacency in the form of the VIX still at mid-teens or something like that, and you have rising interest rates, rising dollar, you have record valuations. We just talked about the equity risk premium at 23-year lows. That does set up for a messy period if there's just a little bit of a hiccup. I'll just mention this lastly. If you look at the

KRE, that's the Regional Banking Index, or it's the ETF that trades on it, it has totally filled in the gap from early November, guys. So we had this move where it went from, I want to say, 60 to 70 in about two weeks. And now here we are back below 60. So investors...

are not buying what was being served up by that whole deregulation trade. So keep a close eye on that one. You know, the small cap index is not a monolith, but something that we watch very closely comes in the form of the IWM. That's the Russell 2000 ETF. iShares Russell 2000 ETF.

I want to point out that theoretically, if rates are going higher, historically, that's meant the economy is doing better, which again, should lend itself to strength in small caps. But I think the small cap performance over the last month and a half or two months suggests that something else is going on. So we had an IWM that traded to levels that we probably last saw in the fall of 2021, seemingly failed at those levels.

But something else that I'm watching very closely, a laundry list, I'm sorry, but is how the IWM performs over the next few weeks with rates going higher and with some of the data we have coming out. I think that's going to be a great tell as well. No doubt. I mean, again, just like the KRE, it not only filled in that entire move from November 6th, I think it was up about 10% in the next two weeks or so after the election. And it's below those levels and looks a bit precarious. And I think the point...

you know, you want to make about small caps, their cost of capital is higher. Their cost of financing their own debt is higher. If they do see a weakening of the economy, it's going to be felt first there. They don't have the dollar exposure, but they do have exposure to a trade war in tariffs. And that's something that it's also very hard for those companies to manage. Let's talk about this change in content moderation by Meta.

This was like really big news yesterday. It was kind of interesting. I'm not on the Twitter, so I don't see the little arguments that are going on over there. But I know it was talked about far and wide in the tech communities. And, you know, I was on MSNBC on the 11th hour last night. They led the show off with that. And that's what I was there to kind of talk about. And, you know, this is interesting on a whole number of levels. We know that Facebook.com.

Meta had been in the hot seat going back to 2016 and the election there. Right. And, you know, there was this back and forth between what they were censoring, you know, what they were moderating. They, you know, for all intents and purposes, I think it was widely believed that they didn't do a good job. And that was like kind of a bipartisan sort of thing. They hired tens of thousands of fact checkers.

Right. So the news yesterday is that they are getting rid of these fact checkers. Now, one of the big issues that now that Trump has won again, you know, Trump really came after, you know, Facebook in 2020 when he lost. Right. And so so you've had this flip flopping of this sort of thing. And so Meta has been turned around, I think, a

numerous situations. In September, Trump was suggesting, this is before the election, obviously, that, you know, Meta and Zuckerberg in particular, you know, were the enemy of the people. He even went as far as to say that if they were found to doing some goofy stuff, if he was reelected, that he would be in jail, you know, for the rest of his life or something like that. So here we are right now that Meta does this about face. They're getting rid of fact checkers. They're going to community nodes. Zuckerberg, you know,

also suggested they're going to do what Twitter is doing, what Elon Musk is doing. Now, Elon Musk and Zuckerberg, for a whole host of reasons, have been at odds with each other for years now, not just about social media, but also about generative AI and the like. So I just think this issue is really interesting. I think Zuckerberg, for the most part, by most sides of this, has really been panned. Obviously, the right is in favor of this. Thoughts here, Guy, because, again, I think the rubber hits the road with advertisers.

If this thing turns into a big mess, that's how they're going to be graded on this thing. Okay. So that's the crux of this entire thing. And the Supreme Court ruled that hate speech is actually free speech. So it's important to have that out there because that's a ruling. Whether or not I agree with that or not doesn't matter. So the question one has to ask themselves, if the platform changes and you start to see

you know, more of the content that was, you know, unsavory at best over the last couple of years, you know, return. Do advertisers want their ads associated with some of this speech that potentially could be out there? So it's really going to come down to what are advertisers expecting

comfortable with for a company like Facebook, who's I think, what do you probably know better than I, but 75% of their revenue is derived from exactly that. 95. 95. So, well, there you go. So you just hit the nail on the head. I'll say this as well.

say what you want about Facebook, say what you want about the economy, but the lion's share of the advertisers on Facebook are small and mid-sized businesses, which we just addressed in terms of the IWM. So if one were to see a slowdown, theoretically, that slowdown could hurt Facebook in a

They're clearly in the crosshairs right now. Now, if you look at the performance of the stock, it suggests anything but a company that's probably trading with a trillion and a half market cap. We're probably a couple percent away from the recent all-time high. But again, I mentioned the laundry list. On the laundry list of things to watch, it's going to be how this plays out, not only in terms of the media and public opinion, but how it plays out in terms of the stock performance.

Yeah, and you can agree or disagree with this. You can kind of try to drill down on what you think the motivations are. I think you and I would both agree through the lens of the stock market, like you just said. It's a trillion and a half dollar market cap company. They're expected to do maybe $150 billion in advertising sales. They have a very high gross margin. They've invested tens, if not hundreds,

Hundreds of billions of dollars, you know, at least looking back and going forward in the next couple of years in generative AI build out. You've mentioned this on many of occasions. They are one of the first companies to get the benefit of that spend. And that's one of the reasons why this stock was trading a year ago at 360. And now here it is at 610.

And this is largely, I think, reflective of their dominance as it relates to the digital ad market, but also the promise of what they're going to be able to do in generative AI. So a couple of angles on this. We know the FTC has charged them with monopoly. They're trying to break the company up as it relates to Instagram and WhatsApp. So there's multiple folds here. Is Zuckerberg cozying up to this administration? We know he went down to Mar-a-Lago. We know that they've committed monopsony.

a million dollars, I think, personally and from the company to the inauguration fund. Is this trying to do an end around on some of the regulatory action? I have to think so. And you could also make the case that if you are a fiduciary like Mark Zuckerberg, again, he's got employees, he's got customers, and he's got investors. You could say this is not a bad move on his part. You can disagree with the reasons in which he's doing it. You can think he's a bit feckless. You could think that he's just...

copying what Musk has done because he also wants a seat at the table. And all those things can be true. But at the end of the day, to your point, it could still be good for the stock. You mentioned it right there. I mean, he does have a fiduciary responsibility, not only to his shareholders, but to his employees as well. So you can say that what he's doing is you use the word feckless, you could use coward, whatever word you want to use. But

Quite frankly, I think the current environment suggests he has to do exactly that. And you're seeing other people sort of act in kind as well. So, you know, we could get up on our soapbox and say, you know, you know, we don't approve of this. But quite frankly, you know, this has been going on with various administrations and various industries.

over the years and I think that's one reason people get so exercised about the amount of money that's made its way into politics, but unless something changes, and I think you agree with this as well, we're gonna continue to see actions like this. It's further magnified by just the sheer size of these companies. - Just the last point on this. You can agree or disagree with the actual business move or the politics of it or whatever, but at the end of the day,

The stock market might not care one way or another. I mean, that's – and you and I make that case all the time. There's numerous examples. I just want to make one last point before we get out of here, Guy. So we are now 55 minutes into the trading day. We were talking about NVIDIA that was up 2%. It just went down in the day. Most of the fateful eight down in the day. I'm seeing a lot of red on my fact set screen here. So it could be a very interesting day, especially with tomorrow closed for observance of former President Kavanaugh.

Carter's passing. And then Friday morning, right out of the gate, we get this jobs report. And again, we know that the market is hyper-focused on a lot of this data. And in the face of this, with yields moving higher, to your point, I mean, you suspect we're going to see a 5% 10-year yield in the not-so-distant future.

I do. And I've thought that for a while. We'll see if it plays out. I think there are going to be market forces that try to curtail this move. We'll see if it's effective. And again, with all the data coming out and all the Treasury issuances coming out over the next few months, there's going to be this push-pull.

yields, which is vitally important to continue to watch. All right. Well, listen, you know what we think the Fed put is kaput. We might have a title for this pod there right there. The first ever Wednesday on the tape podcast guy. You and I are going to be back on Friday with an on the tape podcast. We got market call. So check that out. We appreciate you guys being here on a Wednesday with us.